1. Direct bankruptcy costs:
A. Serve as an incentive to increase the financial leverage of a firm.
B. Include both economic and legal costs.
C. Are a disincentive to debt financing
D. Include the costs incurred as a firm tries to avoid bankruptcy protection
E. Are usually very small compared to indirect bankruptcy costs.
2. ART has come out with a new and improved product. As a result, the firm projects an ROE of 29%, and it will maintain a plowback ratio of 0.25. Its earnings this year will be $3.0 per share. Investors expect a 13% rate of return on the stock. What price do you expect ART shares to sell for in 4 years?
$80.46
$54.77
$51.77
$48.27